* Malaysian airliner downed in Ukraine war zone, 295 dead
* Israeli PM orders ground offensive in Gaza -official statement
* Morgan Stanley profit more than doubles, beats estimates
* Dow off 0.9 pct; S&P 500 down 1.2 pct; Nasdaq off 1.4 pct (Updates to close)
By Angela Moon
NEW YORK, July 17 U.S. stocks fell sharply lower on Thursday, with the S&P 500 posting its biggest one-day percentage drop since April 10 on news that a Malaysian Airlines passenger jet crashed near the Ukraine-Russia border.
Investors sold stocks in a move to avoid risk and poured some money into safe-haven investments like gold and U.S. government bonds as the crash stoked concerns that the conflict in Ukraine might widen after U.S. sanctions against Russia were announced late Wednesday.
Almost 300 people died in the crash, caused by a missile fired at the plane, according to a Ukrainian official. The incident follows an increase in tensions between Ukraine and Russia that has resulted in clashes along the border, including the targeting of military aircraft.
Further pressuring the market, Israeli Prime Minister Benjamin Netanyahu on Thursday instructed the military to begin a ground offensive in Gaza, an official statement from his office said. Reuters witnesses and Gaza residents reported heavy artillery and naval shelling and helicopter fire along the Gaza border.
"I can't remember a time when there were more geopolitical skirmishes going on, all of which are creating uncertainty," said Michael Mullaney, chief investment officer at Fiduciary Trust Co in Boston.
"We were already ripe for a correction, but I'm putting today into the 'noise' category for now, since we need to see whether there is follow-through to this move."
The Dow Jones industrial average fell 161.39 points or 0.94 percent, to end at 16,976.81. The S&P 500 lost 23.45 points or 1.18 percent, to 1,958.12. The Nasdaq Composite dropped 62.52 points or 1.41 percent, to 4,363.45.
The CBOE Volatility Index, Wall Street's fear gauge, surged 32.2 percent to 14.54, its highest level since April 15.
The NYSE Arca airline index fell 2.6 percent, with shares of most major U.S. carriers down sharply. American Airlines slid 4.1 percent to $41.70 while United Continental fell 3.5 percent to $43.35.
The Market Vectors Russia exchange-traded fund fell 7.2 percent on consolidated volume of 7.4 million shares.
The major U.S. stock indexes opened slightly lower, with equities holding near the unchanged mark in early morning trading after solid earnings from companies such as Morgan Stanley, down 0.6 percent at $32.30, and UnitedHealth , up 1.6 percent at $85.11.
Stocks skidded to session lows in late morning trading after news of the Malaysian plane crash.
Microsoft shares rose 1 percent to $44.53 after the company said it would cut up to 18,000 jobs, or about 14 percent of its workforce, resulting in pre-tax charges of $1.1 billion to $1.6 billion over the next four quarters.
About 6.63 billion shares traded on U.S. exchanges, above the 5.48 billion average for the month to date, according to data from BATS Global Markets. (Reporting by Angela Moon; Editing by Jan Paschal)